Battle of a reluctant fighter
Farmer with an engineering degree turns to activism, writes Ann Crotty
L ast year small shareholders discovered the powers of the new Companies Act. With the backing of the act a few heroic souls joined Theo Botha to rescue the investment community from the somnambulant approach of our institutional shareholders.
That’s the approach that tries to persuade the millions of investors and savers across the country that, despite some unsettling developments, all is OK. “Don’t worry, we’re on to it, we’re talking to the board behind closed doors,” say the institutions, without any sense of how disturbing that sounds to the rest of us.
It certainly doesn’t do much to address the suspicion that institutional investors are a little too close to large listed companies for the good of the ordinary saver. Those same large listed companies just happen to be a valuable source of the funds for management by those institutional investors.
With any luck 2016’s developments have marked a new trend in shareholder activism, and we can look forward to much more of it in the years to come. And while the wellestablished institutional investors tend to frown on it, there’s little doubt that shareholder activism is increasingly seen as a crucial part of a wellfunctioning market.
The not-so-new Companies Act has been in place for more than five long years. Corporate
lawyer Carl Stein says it gives greater power and enforcement rights to South African shareholders than they previously had, and in some cases even more than they would enjoy under US or UK law. Under the 1973 act minority shareholders had few rights or remedies against an abusive majority shareholder or an antagonistic board of directors, wrote Stein in The New Com
panies Act Unlocked. “The few rights they did have were often likened to those of a minor child: the majority shareholder was ‘king’,” he says.
In drawing up the new act government aimed to foster investor confidence and bring the rights and remedies available to minority shareholders into line with those that existed in most First World countries.
Activists Albie Cilliers and Dave Woollam, who took on the Lewis Group, are not hotshot company lawyers and they’re certainly not hotshot fund managers. They are individuals who refuse to put up with stuff they shouldn’t have to; the sort of stuff the rest of us just suck up and quietly seethe about. They don’t just refuse to put up with it, they try to stop it. While Botha used the annual general meeting as the setting for most of his battles, Cilliers and Woollam have used the courts to attempt to rectify perceived wrongs.
It is a remarkably brave strategy, given how quickly legal bills ratchet up.
Until now the eye-watering costs involved in court action has effectively precluded individuals and small shareholders from going this route. As Stein says, the new act tips things in shareholders’ favour, but only marginally. It still requires considerable heroism from the individual shareholders involved. They are inevitably up against a hefty legal team that can draw on the target company’s seemingly unlimited financial resources. Which is why, if there were an annual prize for shareholder heroism Cilliers would not only win the 2016 prize (pipping Woollam) but already looks the likely favourite for the 2017 prize.
He launched two challenges in 2016 (Sovereign under section 163 and KWV under section 164) and when 2017 was just days old he launched a third (Gooderson, section 164).
It would be difficult to imagine a more unlikely hero than Cilliers, a Cape-based farmer with an engineering degree who has spent much of 2016 applying his sharp and methodical brain to learning what he needs to know about company law. He didn’t plan to spend the year that way. He is, what you might call, the accidental shareholder activist, the old-fashioned kind who just wants to protect the value of his investments.
He has a small portfolio of companies he looks after; at the time he acquired this portfolio he assumed, rather naively as it turned out, that as a minority shareholder he would be treated fairly, especially if the company was listed. He became an activist when he learnt that was not the case.
Early on he assumed that the JSE, the companies & intellectual properties commission and the takeover regulation panel were all there to protect him. In 2016, when he took issue against what he believed was oppression of the minorities by the Sovereign board, Cilliers discovered how limited the protection was that these institutions offered.
In desperation he searched the Companies Act. He found section 163, which provides for relief from oppressive or prejudicial conduct. His was the first oppressive-action case taken against a listed company under the 2008 act.
Though he won, Cilliers vowed, after what proved to be a wrenching experience, to steer clear of legal battles. They are inevitably lengthy and expose underresourced small shareholders to hefty legal bills that are potentially crippling.
But a few months later along came Vivian Imerman’s Vasari Holdings with an offer for KWV, one of Cilliers’ long-
Though he won, Cilliers vowed, after what proved to be a wrenching experience, to steer clear of legal battles
term investments. The complicated plan that had been hammered out during a year’s negotiations between Vasari and Niveus Holdings (which owned 60% of KWV) resulted in Vasari buying KWV’s operational assets, including the KWV brand name, for R1.2bn, to be paid over three years.
As a result, KWV would be fundamentally changed. Gone were all the wine and spirits operations and stocks, left behind were property, art and cash proceeds from the sale.
Cilliers, who has owned KWV shares for years, was not one bit happy about the transaction. He wanted out.
He went back to the Companies Act and learnt everything he could about appraisal rights. Section 164 gives minority shareholders the right, called an appraisal right, to force the company to buy back their shares at a fair value when the majority of shareholders have approved a fundamental transaction.
Having decided he no longer wanted to be part of what was a different company — now renamed La Concorde Holdings — Cilliers had to launch into a complex set of procedures before he was even entitled to demand his fair value in cash.
While the new act has created opportunities for minority shareholders to challenge corporate actions, it hasn’t made it easy for them. Maleka Femida Cassim, professor of law at University of Pretoria, says the process is complex and rigid and difficult to navigate without legal assistance, so inevitably a dissenting shareholder like Cilliers is faced with legal bills.
Cassim says despite its ostensible support for minority shareholders, section 164 oper- ates in favour of the company and against the shareholder as the shareholder may lose his appraisal rights due to an unwitting failure to comply with one of the many technical and complex steps required.
Cilliers is now faced with a more substantial hurdle. He must persuade the court that the R13.47/share he’s been offered by Niveus Holdings is derisory and nowhere close to representing KWV’s fair value, which he estimates is about R20-R21/share. Niveus CEO Andre Van der Veen says the R13.47 was the value determined by KPMG, an independent expert appointed by the board to come up with a valuation before the transaction was approved.
Cilliers dismisses Van der Veen’s offer as ridiculous and says it excludes any consideration for the value of the art and property. The R1.2bn paid by Vasari for the operating assets alone is equivalent to almost R17/share. The art and property left behind is estimated to be worth at least another R3-R4/share, says Cilliers. He also says that in its independent valuation KPMG stated: “This opinion is prepared solely for the KWV independent
Cilliers must persuade the court that the R13.47/share he’s been offered by Niveus Holdings is derisory and nowhere close to representing KWV’s fair value
board for use in the indicated manner and therefore should not be regarded as suitable for use by any other party or give rise to third-party rights.”
The battle to try to persuade the court will take time and inevitably draws Cilliers into more legal fees and exposes him to the real possibility the court will rule in favour of Niveus’s fair-value estimate. And, as always, in court cases there’s the risk of being saddled with an adverse costs order. Additionally, as if to discourage all but the most resilient of individuals from taking on the establishment, during this lengthy process Cilliers loses all the rights relating to his KWV shares.
Cilliers accepts it rather stoically as part of the price he has to pay for being an activist. And, he says, he’s learning a lot with each new case. In his justlaunched battle against Gooderson, Cilliers will argue the 85c/share offered to minority is significantly below fair value. Remarkably, the company, which seems to have less experience of section 164 cases than Cilliers, has told him there is no necessity for it to make him an offer.
Not everyone is as excited about appraisal rights as Cilliers. Corporate lawyers and advisers find it irksome. They may come around in time, just as the deal makers in the US, Canada and New Zealand have.
SA’s relatively new appraisal rights have already influenced corporate transactions. To avoid the possible hefty expense of a rush of disgruntled shareholders trying to cash out, most fundamental transactions now specify that the deal must be abandoned if more than 5% of the shareholders apply for appraisal rights.
Albie Cilliers … Discovered that institutions offer limited protection
The historic Laborie Wine Estate in the Paarl region has been owned by KWV since 1972